With COP26 coming to a close, climate change continues to dominate developments in, or affecting, the pensions and financial services arena. Continuing our series of blogs focusing on climate change and pensions (see our last blog here), we consider here some further key updates for stakeholders in the pensions industry to be aware of.
Pension stewardship recommendations from the Work and Pensions Committee
The House of Commons Work and Pensions Committee has published a report on pension scheme stewardship following their inquiry in 2021 into the government's approach to the same. The Committee made several key recommendations, particularly in view of COP26, such as acquiring international commitments and aiming for global harmonisation on climate reporting standards by commercial entities such as banks and investors. They also recommended a policy focus on good stewardship over divestment, and encouraged the government to prioritise developing green products, to avoid a situation where there are only a limited number of appropriate green assets for pension schemes to invest in. The production of a UK climate roadmap would help schemes in this respect, by providing more certainty around long-term investments (see below).
In terms of the Pensions Regulator, the Committee recommended that it should report annually on the progress of consolidating larger pension schemes and that it should publish guidance for schemes on setting net zero targets.
The report also urges the UK government to take advantage of COP26 by showing global leadership on tackling climate change within the pensions industry. It recognises that hosting the event in Glasgow presents a unique opportunity to achieve agreement on an international level, which the government should seize.
International Monetary Fund (IMF) encourages consideration of green investing incentives
The IMF has recommended in a recent report that, in order to facilitate a green transition, policymakers should consider implementing financial incentives for investing in sustainable funds. This is because, according to the IMF, existing capital will not have a sufficient impact on climate change and significant additional investment (as much as £14.7 trillion) will be needed over the next twenty years to effect a green transition.
Sustainable funds currently make up only a small proportion of the investment fund sector (around 7%). Amongst the tools governments could consider to incentivise increased flows into such funds are favourable tax treatment for sustainable, climate-themed funds, in addition to a carbon tax on funds which do not meet certain environmental standards. Pension scheme savings are prime candidates for being captured by these incentives.
Financial incentives were just one of numerous recommendations made by the IMF in its report, which also included strengthening Environmental, Social and Governance data and disclosure standards and regulatory oversight to safeguard against greenwashing.
UK government publishes greening finance and sustainable investing roadmap
On 18 October, Greening Finance: A Roadmap to Sustainable Investing was published by HM Treasury. This policy paper exhibits the government's plan to make green the UK's financial system and align it with its net zero commitment, which it intends to effect in three stages.
Firstly, investors and consumers will be informed to fill the information gap for financial market participants, and a passage of information on sustainability from corporates to such participants will be ensured. Secondly, that information will be acted upon by creating requirements that sustainability is integrated into business and financial decision-making (for example, risk management and investor stewardship). Thirdly, physical flows will be shifted, leading to the movement of financial flows to align with UK net zero undertakings and broader environmental and sustainability objectives.
The paper primarily focuses on the first phase and addresses new Sustainability Disclosure Requirements that will oblige companies, certain financial institutions and occupational pension schemes to disclose information on sustainability. The pensions and investment sectors will be expected to use the information these requirements produce to adjust their financial flows with a view to a net zero economy. A further part of the information infrastructure will be the implementation of a UK green taxonomy, to harmonise definitions around what is considered environmentally sustainable and set objectives and criteria in this respect. This will draw on the existing EU taxonomy.
If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team, or your usual Brodies contact.